Ally Financial says U.S. businesses not for sale

AndrewR. Johnson

--Ally says ResCap bankruptcy and international business sales will leave company in stronger position

--Company has no definite plans for an IPO

--Analysts question whether other businesses will be put up for sale

(Updated with details about financial results in paragraphs 11 and 12 and details about Fitch actions in paragraphs 23-25.)

NEW YORK (MarketWatch) -- The bankruptcy of Ally Financial Inc.'s troubled mortgage business and potential sales of its international units will put the auto lender on stronger footing, Ally executives said Tuesday, despite questions about the ultimate fate of Ally's domestic operations.

The mortgage unit, Residential Capital, filed for Chapter 11 bankruptcy Monday in Manhattan, paving the way for Ally to potentially rid itself of costly litigation and accelerate its repayment of a government bailout that topped $17 billion. To aid that effort, Ally also said it planned to sell auto-finance, insurance and banking operations in Canada, Mexico, Europe and South America.

The combination of the moves will "really take our auto franchise, which is already a leader, to the next level and take Ally Bank to the next level" in the U.S., Michael Carpenter, Ally's chief executive officer, said on a conference call to discuss the strategy. The actions could also "accelerate our path to investment-grade" ratings and lower funding costs for loans over time.

Ally's bank and its other businesses are not a part of ResCap's bankruptcy.

Some analysts and investors are skeptical of Ally's future as a stand-alone company. Severing itself from ResCap would significantly reduce its exposure to the mortgage business, long a goal of a company that has been saddled with lawsuits from private investors, regulators, and others over soured mortgage securities and shoddy underwriting standards.

Selling its international businesses would essentially leave Ally with a large auto-finance platform for dealer and consumer sales and an online bank offering traditional deposit accounts.

Analysts questioned whether Ally would revive efforts for an initial public offering, plans it put on hold last year as mortgage challenges mounted, or if it would have to ultimately sell its remaining businesses.

Sales of the U.S. auto-lending business and online bank are "absolutely not" in the cards, Carpenter said.

ResCap's bankruptcy will take until the end of the year, and the sale of Ally's international businesses aren't likely to occur before the end of the third quarter, Carpenter said. After that it could consider several options, including an IPO, having a private-equity buyer acquire the Treasury Department's stake in the company or potential acquisitions.

"My perspective is that we've kind of unlocked a box and...created [options] and opportunity as a result of these steps," Carpenter said.

Ally expects to take a charge of $1.31 billion this quarter from ResCap's bankruptcy and could take future restructuring charges, executives said. Its near-term earnings will be negatively affected by the loss of mortgage revenue, though in the future its results should be more stable, they said.

Ally would have $136.6 billion in assets after eliminating $15.7 billion of ResCap assets and another $34 billion of assets tied to its international businesses.

Ally is 74% owned by the U.S. government after receiving more than $17 billion in bailout funds during the financial crisis. Formerly the in-house financing arm for General Motors, Ally was bailed out as part of the government's broader rescue of the auto industry.

It has paid back $5.5 billion of its bailout. Severing itself from ResCap and selling its international businesses could help it bring its repayment to about two-thirds of its total bailout, it said.

As part of ResCap's bankruptcy, Nationstar Mortgage Holdings Inc.
NSM
a mortgage-servicing company 80% owned by Fortress Investment Group LLC
FIG, +0.19%
was named the lead bidder in a $2.4 billion auction of a majority of ResCap's assets, the company said. Ally is also making a bid valued at about $1.6 billion for a portfolio of ResCap loans. Other potential buyers will be able to make competing bids for ResCap assets.

A judge Monday said ResCap could begin borrowing on $1.25 billion of a $1.45 billion debtor-in-possession loan from a group led by Barclays PLC
BCS, +0.26%
to continue operating in bankruptcy. The debtor-in-possession loan is one of the largest since the financial crisis.

Part of the Barclays-led financing will be used to purchase assets from two offshore lenders that are owed more than $900 million by a ResCap affiliate not in bankruptcy. Those loans will then be deemed paid off, and the assets will be transferred to two new ResCap entities that were created for the purpose of the bankruptcy filing. Those assets will be used as collateral for the loan.

Aside from the Barclays loan, Ally said it would provide ResCap with a separate DIP loan of $150 million and make a $750 million payment to ResCap's estate.

That payment is part of a settlement Ally reached with ResCap over potential claims that could arise over the separateness of the companies and mortgage-repurchase claims against ResCap, Carpenter said.

The settlement, subject to court approval, would protect Ally from having to pay losses arising from ResCap's bankruptcy.

Such issues have been a lingering question mark over Ally's ability to make a clean break from ResCap, as ResCap creditors could claim the companies are too intertwined to separate through a bankruptcy. Carpenter has repeatedly stressed ResCap is a separate company with its own board and does not believe such claims have merit. The settlement is intended to eliminate the potential for costly legal battles that it could face.

"Even though we do not believe that Ally would in the end have any liability, we believe we would have been pursuing lawsuits...and we would have paid a good portion of what we settled for in legal fees," Carpenter said.

To resolve Ally's rating watch, Fitch said it will focus on court approval of the proposed settlement with ResCap and its creditors, repayment of debt and other factors.

"If Ally is released from existing and potential claims this would be a positive development, though litigation may continue to be an overhang as creditors or third parties may challenge such a release," Fitch said.

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